Why VTech Shares Crashed Nearly 5% Today

What happened

Producer of children’s learning products VTech Holdings Ltd (SEHK: 303) fell to as low as HK$52.20 in Hong Kong trading today. It recovered slightly to finish the day down 4.4% at HK$52.45.

This was in stark contrast to Hong Kong’s benchmark Hang Seng Index, which finished Tuesday up 1.9% on positive sentiment surrounding a possible vaccine for Covid-19.

VTech has a market cap of only HK$13.2 billion (US$1.7 billion) and its shares have fallen about 30% so far in 2020.

So what

The company is renowned for producing widely-loved electronic toys and learning products for children. However, the firm is also a leading manufacturer of cordless phones in Hong Kong.

More importantly, the firm has been known to investors as a reliable dividend payer and has frequently yielded above 7%.

The company announced its earnings yesterday for its financial year ended 31 March 2020 (FY 2020). Even though the firm booked a slight increase in revenue and net profit that was up 11.3% year-on-year, VTech cut its dividend.

As we should know, cutting the dividend can be bad news for share prices. Even though VTech had maintained its interim dividend, its final dividend per share (DPS) was cut from US$0.50 in FY 2019 to US$0.36.

That meant its full-year DPS (including interim dividend) for FY 2020 ended up being US$0.53, down 26% year-on-year. This was mainly done to conserve cash.

With that, its dividend payout ratio also came down from near 100% in FY 2019 to a more reasonable level of 70%.

What now  

Even taking into account this dividend cut, VTech shares are still yielding an attractive 7.8% on a 12-month forward basis.

For investors, the important question is whether the company can rebound in the short term. That’s still a big question mark given the company has been impacted by the US-China trade war and Covid-19.